RESEARCH

KENYA MARKET UPDATE - 2ND HALF 2018

ALP North at Tatu City, Kiambu County HIGHLIGHTS • ’s GDP records faster growth in 2018 • Number of mortgage accounts rises • Cement production and consumption drop as value of • Kenya remains favourable destination for MICE tourism approved building plans falls • KQ launches direct flights to the US • Court suspends Housing Levy Fund • ALP opens modern Grade-A warehousing park • International retailers continue to expand • International educational institutions increase local • Prime office rents stagnate footprint • Office space absorption continues to gain momentum • Prime residential prices decline The Economy FIGURE 1: The Kenyan economy expanded by 6% in the GDP Rates third quarter of 2018, compared to 4.7% over the same period in 2017. During the review period several sectors recorded improved growth rates. These included accommodation and food services, construction, financial services and insurance, public administration, manufacturing, and mining and quarrying. The real estate sector recorded the slowest quarterly growth since 2014. This was mainly attributed to tighter lending restriction s by commercial banks and high capital costs of properties currently in the market.

According to the World Bank, the Kenyan economy was expected to rebound in 2018 after a slowdown in 2017. The annual GDP growth was projected to expand by 5.7% in 2018 compared to 4.9% in 2017. This was mainly attributed to favourable weather conditions which improved the agricultural sector, stable political climate, growth in private consumption and investment, and overall renewed confidence in the business environment. The annual GDP is further Source: Kenya National Bureau of Statistics (KNBS) & World Bank forecast to grow by 5.8% in 2019. The World Bank also noted that the Sub-Saharan African annual GDP rate would rise by 2.7% FIGURE 2: in 2018 compared to 2.3% in 2017. Despite Value of Building Plans Vs Cement Consumption the region’s three largest economies Angola, Nigeria and South Africa experiencing slow growth, the rest of the region’s fast-growing, non-resource rich countries had improved economic activity. Sub-Saharan Africa’s GDP is predicted to grow by 3.3% in 2019.

Cement production decreased to 4.71 million metric tonnes (MT) in the 10 months to October 2018, an 8.7% drop from 5.16 million metric tonnes over the same period in 2017. Similarly, cement consumption decreased to 4.58 million metric tonnes in the 10 months, a 6% drop from 4.87 million metric tonnes over the same period in 2017. The value of building plans approved in County decreased to Ksh 169.26 billion in the 10 months to October Source: KNBS 2018 a 17.6% drop from Ksh 205.54 billion in a comparable period in 2017. FIGURE 3: The decrease in cement production, cement Foreign Currency Exchange Rates consumption and the value of building plans approved is attributable to the current oversupply and lack of transactions, indicating caution amongst developers in undertaking new projects. Additionally, the interest rate cap has hindered many developments as commercial banks became increasingly cautious in lending to the private sector.

The Kenya Shilling remained stable against most major currencies such as the Sterling Pound, US Dollar, Euro and Chinese Yuan over the second half of 2018. This was mainly due to inflows from the horticulture and tourism sectors, as well as diaspora remittances.

Source: Central Bank of Kenya KENYA MARKET UPDATE 2ND HALF 2018

Despite the inflation rate remaining within the FIGURE 4: government’s target range, it steadily rose Quarterly Diaspora Remittances over the review period with September and December recording the highest monthly inflation rates in 2018 at 5.7% and 5.71% respectively.

The President in September signed into law the Finance Bill 2018 which imposed a 8% Value Added Tax (VAT) on petroleum products which may have contributed to the increase in inflation. In respect of interest rates, the Monetary Policy Committee (MPC) lowered the Central Bank Rate (CBR) to 9% from 9.5% in July to boost economic output, which saw commercial banks’ lending rates remain at 13% over the second half of 2018 in line with the Banking Act.

Diaspora remittances increased by circa 38% to US$ 2.2 million in the 10 months to October 2018 compared to US$ 1.6 million in a similar Source: KNBS period in 2018, with the main source being North America. FIGURE 5: Benchmark Economic Rates Listed Real Estate Companies Listed real estate equities (Home Afrika and Stanlib Fahari I-REIT) continued to perform poorly on the Nairobi Securities Exchange in the second half of 2018. Stanlib Fahari I-REIT closed at Ksh 10.95 in December, which was 45% lower than its initial listing price of Ksh 20. Home Afrika’s share price closed at Ksh 0.68 in December, which was 94% lower than the initial listing price of Ksh 12. The property developer announced in September plans to exit two of its ventures in Kisumu and Mombasa counties due to inadequate capital. It is currently in the process of seeking buyers to purchase the land in the Kisumu Lakeview project and is in negotiations with Lango investors to exit the Kwale Lango project. Home Afrika said it will use the funds generated from the project disposals to complete Migaa, a residential development Source: Central Bank of Kenya located in Kiambu County.

FIGURE 6: Real Estate-Related Listings Infrastructure & Policy Construction of Phase 2 of the 26.8-kilometre Dongo Kundu bypass in Mombasa, which was set to begin in August, has been delayed. Phase 2 will entail the construction of a 8.9-km road between Mwache junction and Mteza. Phase 3, which has not commenced, entails the construction of a 6.9-km road between Mteza and Kibudani, linking the highway to the Likoni-Lunga Lunga Road. Once completed, the bypass is expected to connect the North Coast to the South Coast.

In the second half of 2018, the government began to focus on bridging the current housing deficit through construction of 500,000 affordable houses by 2022 and other tax Source: Nairobi Securities Exchange incentives. In July, the President approved the amendment Westgate Shopping Mall and part of the attributed to the current oversupply and recent to the Income Tax Act allowing home buyers Oshwal Centre, all in Westlands; South End openings of various retail centres trading over a 15% relief on gross salaries if they purchase Mall on Langata Road; Grand Manor Hotel in the review period. Various landlords therefore properties under the affordable housing Gigiri; Shell service station and a Java House resorted to providing concessions on rentals scheme. However, the tax relief will not exceed outlet in Kileleshwa; and Airgate Centre (Taj and other incentives to attract tenants and to Ksh 108,000 per annum. The amendment also Mall) on Airport North Road. The government increase occupancy levels. Footfall in shopping exempted first-time home buyers from the in December suspended the demolition of malls over the review period rose mainly owing Stamp Duty. The Housing Levy Fund, which properties across the country. to the revival of anchor tenants in the retail was part of the Finance Bill 2018, was signed centres replacing Nakumatt. into law in September. The law states that every employee will contribute 1.5% of their Zhong Wu (Fujian) Cross Border E-commerce monthly gross salary, while employers will Retail Co Ltd, a subsidiary of China Wu Yi Limited, contribute a maximum of Ksh 5,000 for each opened a Ksh 5 billion specialised home Prime retail rents remained unchanged in the employee. The funds raised will go towards furnishings and building materials supermarket second half of 2018 at US$5.1/sqft/month the construction of affordable housing. The in Athi River, Machakos County, known as while the service charge across retail malls Housing Levy Fund is, however, yet to be Coloho Mall. This is East Africa’s first and in Kenya ranged from Kshs 44 to Ksh 59 per fully implemented as it was suspended by the largest building materials warehouse with a square foot per month. The stagnation was Employment and Labour Relations Court in built-up area of 300,000 square feet. mainly attributed to the retail market adjusting December. to continued oversupply in certain locations, New retail developments that opened within In October, the Government approved making it a tenant’s market. the second half of 2018 are listed on Table 1. guidelines for the implementation of affordable Some of the major retail developments in the Escalations on Kenya Shilling leases ranged at housing scheme. The guidelines stipulate that pipeline are listed on Table 2. 5-10% annually. the State Department for Housing and Urban Development (SDHUD) will steer the Affordable International retail brands continued expanding Occupancy levels for established malls and entering the Kenyan market in the second Housing Programme (AHP) and manage remained high at over 90%. Newly completed delivery throughout the project lifecycle. half of the year. Westgate Shopping Mall retail centres continue to experience low opened its doors to South African supermarket occupancy levels of 45-75%. This is mainly The guidelines also address the project’s chain Shoprite as the new anchor tenant, financing, cost, design, quality and affordability as well as forming a ‘level playing field’ for both the public and private sector investors. The TABLE 1: government has defined four levels of housing Completed Retail Developments types under the AHP. These include: APPROX. SIZE • The Social category, which targets RETAIL DEVELOPMENT LOCATION (SQFT) employees who earn a salary of up to Ksh 14,999. They are eligible for the social Westgate Mall Phase II Westlands, Nairobi 150,000 housing plan. The Well Karen, Nairobi 80,000 • The Low Cost category, which targets employees earning Ksh 15,000 - 49,999. Diamond Plaza II Parklands, Nairobi 90,000 They are eligible for affordable housing. Kiambu Mall Kiambu 150,000

• The Mortgage category, which targets Signature Mall Mlolongo 221,000 those earning Ksh 50,000 - 99,999. They are eligible for the mortgage plan. Rupa Mall Eldoret 150,000 Airport Centre Mall Changamwe, Mombasa 172,222 • Middle and High-Income earners category, which targets employees The Waterfront Karen, Nairobi 210,000 who earn more than Ksh 100,000 per Coloho Mall Athi River, Machakos County 300,000 month. This category is exempt from purchasing houses under the AHP and Source: Knight Frank Kenya will receive their contribution plus interest to their pension scheme after 15 years of contribution or upon retirement.

The AHP is expected to develop four sizes of TABLE 2: houses ranging from studio apartments at Ksh Retail Developments in the pipeline 600,000, to 3-bedroom apartments at Ksh 2 million. APPROX. SIZE RETAIL DEVELOPMENT LOCATION (SQFT) In the review period, the National Environment Management Authority (NEMA) announced it Sarit Centre Phase III Westlands, Nairobi 323,000 would demolish 4,000 buildings constructed on riparian reserves. Some of the notable Comesa Mall Eastleigh, Nairobi 280,000 residential and commercial properties that were ENA Hub Nakuru 116,000 demolished over the review period included, Ukay Centre and the car park opposite Source: Knight Frank Kenya KENYA MARKET UPDATE 2ND HALF 2018

Spanish fashion brand Mango, German fashion Office One of the major takers of space was the brand Hugo Boss, Japanese lifestyle brand serviced office sector from both local and Miniso and South African restaurant chain The Prime asking rents in Nairobi stagnated over international firms. Grilll Shack. French sports retailer Decathlon the second half of 2018 at US$1.3/sqft/month. also opened at The Hub Karen over the review This was a result of continued oversupply in Serviced offices vis-à-vis traditional offices period. specific locations of the market. have recently gained traction, with demand driven by small and medium-sized enterprises It is anticipated that more international brands Absorption of Grade A office space increased (SMEs) for various reasons, which include: will expand their presence into the Kenyan by 63% in the review period compared to the lower operating costs, risk reduction, lease market in 2019. Looking ahead, a reduction in first half of 2018. The increase was mainly due agreement and office space flexibility, and the supply of retail malls is projected to boost to completion of Grade A space in strategic providing SMEs the opportunity to be situated absorption of space in the existing malls. locations and companies that looked to finalise in prime locations. However, prime rents are expected to stagnate on deals before the end of their financial years, despite the forecasted economic growth due even as the economy continued to recover Completions in Nairobi over the review period to the current oversupply. from the previous year’s election. included One Africa Place (138,004sqft), The Promenade (215,999sqft) and Victoria Towers in Two Rivers (85,002sqft).

FIGURE 7: East and Central Africa’s tallest building, Average Prime Office Rental Rate per Month Britam Tower in Upperhill, opened in July. The building has a lettable area of 349,999sqft. Avic International Real Estate Kenya Limited launched the Global Trade Centre (GTC) in September. The Ksh 40 billion mixed-use development formerly known as AVIC Towers comprises of an office tower, luxury five- star hotel, residential apartment complex and a retail mall. This is the first mixed-use development being constructed in the prime location and is expected to be completed in 2020.

Major commercial office developments in Nairobi that are in the pipeline are indicated on Table 3.

Prime rents in the commercial office market are expected to continue stagnating over the first half of 2019 due to the current oversupply and upcoming developments.

Source: Knight Frank Kenya Residential Prime residential prices decreased by 4.5% in 2018, compared to 0.9% in 2017. This TABLE 3: was mainly attributed to an oversupply in the Commercial Developments in the pipeline market, tighter liquidity due to the new banking legislation which capped interest rates and a APPROX. COMMERCIAL DEVELOPMENT LOCATION general market price correction, all of which SIZE (SQFT) turned the high-end residential market into a Merchant Square Riverside 165,000 buyers’ market. A trend also noted in 2018 saw buyers opting to purchase distressed 1 Park Avenue Parklands 133,000 properties rather than new properties, as the former’s prices were favourable. Laxcon Plaza Parklands 100,000 Prime residential rents decreased at a slower Church Commissioners for Kenya (CCK) Kilimani 120,000 rate of 1.34% in 2018 compared to 2.75% Capital Square Parklands 90,000 in 2017. Despite the residential rental market still experiencing an oversupply, the high-end Le’ Mac Westlands 85,000 segment of the market still has significant Global Trade Centre (GTC) Westlands 678,000 demand, particularly from expatriates and middle- to high-income earners owing to the Sandalwood Riverside 250,000 locations and quality of houses. Pinnacle (office section) Upperhill 70,000 Various public institutions and private firms The Address Westlands 243,000 made major residential announcements over the second half of 2018. Centum Investments 19 Kabasarian Avenue Lavington 76,600 announced it would commence the second phase of the Two Rivers development in Source: Knight Frank Kenya KENYA MARKET UPDATE 2ND HALF 2018

use development. Unity Homes will construct FIGURE 8: 1,200 affordable homes, which will sit over 23 Prime Residential Rents and Prices acres and cost Ksh 4.5 billion to construct. Karibu Homes will also build 1,000 homes in the mixed-use development at a cost of Ksh 4 billion.

Home ownership remains a challenge in the market even as the number of mortgage loans increased from 24,059 in 2016 to 26,187 in 2017. The 8.8% increase was mainly attributed to the favourable interest rates available.

Hotel & Tourism Leading global hospitality brands continued to venture into the Kenyan market via expansion or by taking over operational hotels, as the country remained a popular destination for luxury travellers. Five-star luxury hotel, Sankara Hotel in Westlands, joined the American luxury hospitality group Marriott International through a franchise agreement. The hotel will Source: Knight Frank Kenya begin trading in 2019 as a Marriott brand, but the Sankara Hotel Group will be retained as the manager. Marriott International currently operates two hotels – Four Points by Sheraton Nairobi, which entails the construction of 196 The Kenyan Government and the United Nairobi Airport and Four Points by Sheraton residential units over a gross built up area of Nations Office for Project Services (UNOPS) Nairobi Hurlingham – which it took over from 495,140sqft. Lancet Housing Co-operative in September signed an affordable housing Best Western Hotels & Resorts brand. The Society Limited broke ground on its Ksh 1.2 agreement to deliver 100,000 affordable hospitality group currently has two upcoming billion Lancet Village mixed-use development housing units in line with the Affordable hotels in the pipeline: JW Marriott, which which sits on 10 acres in Machakos County. Housing Programme. Financing of the project is expected to open in 2020 and will be The mixed-use development consists of 188 is from both the Kenya government and located at GTC’s mixed-use development residential units, a commercial area and an UNOPS. in Westlands, and Protea Hotel by Marriott educational institution. Lancet said it will retain Nairobi, which will be located near the Jomo 50% of the residential units. In the private sector, Tatu City set aside 300 acres towards the construction of 10,000 Kenyatta International Airport (JKIA) and is The Mombasa County Government announced houses, which will be part of the government’s expected to open in 2021. plans to invest Ksh 200 billion towards an affordable housing scheme and will be priced Other major hotel developments in the pipeline affordable housing scheme, which it expects to at Ksh 1.5-5 million. Construction is set to include the Radisson Blu Hotel and Apartments achieve by demolishing and reconstructing old commence in May 2019. Tatu City also signed in Arboretum by Carlson Rezidor, The Alba government housing estates such as Mzizima, agreements with several residential developers Hotel in Lavington Nairobi and Azure Best Changamwe and Likoni Customs. to construct residential units within the Western at Signature Mall, both part of Best allocated residential sections of the mixed- Western’s collection. The increased supply of hotel rooms especially in and around Nairobi, is expected to have a downward pressure on FIGURE 9: occupancy and room rates. Trends in international visitor arrivals & tourism earnings Kenya’s Meetings, Incentives, Conferences and Events (MICE) sector has rapidly grown over the past few years, allowing the country to continue raising its profile as a top destination for business tourists. The Kenyan government hosted the Sustainable Blue Economy Conference in November, the first of the global conference, hosting over 18,000 participants including heads of States and government and heads of international organisations. It addressed the sustainable use of oceans, lakes, seas and rivers for sustainable economic development, improved livelihoods and job creation. The growth of MICE tourism has had a ripple effect on the residential market as some business tourists opted to stay in serviced apartments close to the conference venues.

Source: KNBS and Kenya Tourism Board Tourist arrivals surged by 38.1% to 2.03 million Industrial Park will sit on 103 acres and is in 2018 from 1.47 million in 2017. This is the located off the Eastern bypass. Phase 1 is highest number of tourist arrivals recorded in expected to be completed within the first half the country over the last five years. The main of 2019. factors that attributed to this increase included political stability, withdrawal of travel advisories and improved security regionally. Institutional Market As is the norm over the festive season, hotels Crawford International School owned by at the Coast recorded a significant increase in ADvTECH, Africa’s largest private education bookings as the number of domestic guests provider, opened in Kiambu’s Tatu City in pushed up occupancy to more than 65% over September. The educational institution has a the festive season. capacity of 1,700 students.

In October, Kenya Airways (KQ) made its Sabis International School in Runda opened inaugural 15-hour direct flight from Nairobi in September through a partnership with to New York, becoming the second national Centum Investments Company, Dubai firm carrier from Eastern Africa after Ethiopian Investbridge Capital and South African firm, Airways to fly to the US. KQ announced in Sabis Education Network. The educational December it would reduce New York daily institution will cost approximately Ksh 2 billion flights from January to five per week over off- to develop and sits on 20 acres. The investors peak periods, which are characterised by lower are expected to set aside an additional Ksh demand such as during the winter season. 1 billion for expansion, which will go towards the construction of three accommodation The launch of the direct flights to the US blocks, two classroom blocks and a 400-metre is expected to have several benefits to the athletics track. Kenyan economy, including boosting trade ties between the two countries, promoting In the same period, Acorn Holdings Africa the inflow of foreign investments, creating continued to roll out its purpose-built student employment and increasing tourism, which residences. It currently has two developments is one of Kenya’s major foreign exchange under construction in Parklands and Madaraka earners. that combined will provide over 1,300 student beds, with another 2,000 in the pipeline, Qatar Airways in December launched direct spread over various locations in Nairobi. flights to Mombasa, Kenya’s second largest city, joining other international carriers such as Ethiopian Airlines, Turkish Airlines and RwandAir on the destination. Whilst this increases the number and variety of airlines that fly directly to Kenya’s main coastal tourist destination, it will also be a competitive threat to local carriers which currently dominate the coastal route.

Industrial Market Demand for high quality warehousing space continued to rise in the second half of 2018. In September, Africa Logistics Properties (ALP) launched ALP North, its 527,432sqft Grade A warehousing park, which was 75% pre-let. Since unveiling ALP North, it has signed a long-term lease for 32,291sqft with Kensta, East Africa’s largest regional print and packaging company. ALP West, ALP’s second project, completed road infrastructure on its 49-acre site at the Tilisi Logistic Park where it plans to construct a 1,076,391sqft logistics and distribution warehousing complex.

Infrastructure construction for Phase 1 of the Park was completed during the review period with Phase 2 expected to commence within the first half of 2019.

Improvon Group and private equity fund Actis, through a partnership, announced the launch of a 53,820-sq ft warehousing development estimated to cost Ksh 11 billion. Nairobi Gate MANAGEMENT Ben Woodhams Managing Director +254 733 619 031 [email protected]

Maina Mwangi Executive Director & Head – Property Management +254 733 805 205 [email protected]

VALUATION & ADVISORY Bernadette Gitari General Manager – Knight Frank Valuers +254 725 777 686 [email protected]

AGENCY Anthony Havelock Head – Agency +254 727 099 364 [email protected]

RESEARCH Charles Macharia Senior Research Analyst +254 721 386 019 [email protected]

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